Original Liu Xiaobo
The two things mentioned in the title refer to:
First, China's central bank has borrowed hundreds of billions of yuan in government bonds and is ready to sell them to curb the overheated bond market.
Second, the Fed may cut interest rates ahead of schedule to start a new cycle of interest rate cuts.
Both of these events are very big and it is not an exaggeration to describe them as "super events".
Let's start with the fact that China's central bank will sell off government bonds.
Yesterday at noon, a number of media reported that the central bank had signed bond borrowing agreements with several major financial institutions, and the central bank had borrowed hundreds of billions of medium and long-term government bonds.
Why do central banks borrow government bonds from financial institutions?
It's for selling, for intervening in the irrational bond market.
Recently, due to the poor performance of the property market, the stock market, and the foreign exchange market, a large amount of funds have poured into the bond market, and the price of medium- and long-term treasury bonds has risen significantly.
There are even some institutions that buy treasury bonds with leverage, buy a batch of mortgages, and buy them after financing. You may only have a principal of 1 yuan, but you can buy a treasury bond of 5 yuan or even 10 yuan. As soon as there is a stir in the bond market, there may be a stampede.
Why are institutions buying Treasury bonds? In addition to the above-mentioned poor property market, stock market, and foreign exchange market, and asset shortage, institutions are betting that China's interest rates will be low for a long time, or even zero interest rates.
Some institutions have threatened to hit China's 10-year government bond yield close to zero.
Anyone with financial knowledge knows that Treasury yields are important interest rate indicators, and the 10-year Treasury yield is especially important. The current yield on 10-year government bonds in China is 2.267%, 4.278% in the United States, and 1.075% in Japan.
One of the main reasons for the recent sharp depreciation of the yen is that Japan's interest rates are relatively high (and there are no exchange controls) compared to the United States. China is also currently in a rare period in history, where interest rates are inverted to the United States, and if government bonds continue to rise and yields continue to fall in the future, it will exacerbate the inversion of interest rates and trigger the risk of continued depreciation of the exchange rate.
The overheating of the Treasury bond market has three negative consequences:
First, the diversion of funds has made A-shares struggle around 3,000 points, which is not conducive to activating the stock market.
Second, the yield of government bonds has been falling, triggering depreciation pressure on the RMB exchange rate.
Third, excessive leverage and speculation on treasury bonds imply huge financial risks, and the central bank warns some institutions: Do you want to repeat the bankruptcy of Silicon Valley Bank?
Since the beginning of this year, the Ministry of Finance and the People's Bank of China have repeatedly stated that the central bank will normalize the trading of treasury bonds in the secondary market in the future. Given the current state of the economy, the assumed view is that the central bank will buy a lot of government bonds first. This has intensified the heat in the Treasury market.
Until the end of May, the official statement: the central bank may sell first!
The market still doesn't quite understand. The central bank does not hold many government bonds, which are basically special government bonds, so how can it intervene in the trend of medium and long-term government bonds?
The answer is finally here: the central bank borrows Treasury bonds first and then sells them. Wait for the treasury bonds to fall back and buy them back.
This is the same way as shorting securities in the stock market.
There are also bond investors who don't give up: you can sell it, but don't you still have to buy it back? So I'm not afraid.
If you think so, you misestimate the situation.
The rules are set by the central bank and the Ministry of Finance, and if you play a game with the rule-makers, you will only lose. Judging from the latest reports, the central bank borrows treasury bonds in the form of credit, and the term is not fixed. If you sell it tomorrow, you may buy it back in half a year, or you may buy it back in 2 years, do you still dare to do it?
Moreover, China is entering the peak period of government bond issuance, with 4.16 trillion new government bonds last year, and may add more than 5 trillion yuan this year, and it may be above this level in the next few years.
So, does the central bank have to turn a bond bull market into a bear market? Of course not, just to correct deviations.
The figure above is the treasury bond interest rate curve on the official website of the Ministry of Finance, from left to right, the yields of short-term, medium-term, and long-term treasury bonds, which are connected to a curve.
The central bank's regulatory objective, in Pan Gongsheng's words, is to "maintain a normal upward slope yield curve", which means that the blue line in the chart above becomes flat when it reaches the right, and should be sloping upwards, or steeper (red line).
The way to raise the yield on medium- and long-term treasury bonds is to let them fall, and the means is to sell them by borrowing treasury bonds.
By selling Treasury bonds, central banks can kill four birds with one stone:
First, promote the deleveraging of the treasury bond market to prevent financial risks;
Second, guide funds from the bond market to the stock market.
Third, we should avoid the inversion of the interest rate differential between China and the United States and maintain the stability of the exchange rate.
Fourth, and more importantly, the central bank has opened an era of normalized buying and selling of treasury bonds by selling treasury bonds. This means that there will be a historic change in the way money is printed in the future. In the future, China's money printing method will be similar to that of the Fed - expanding its balance sheet and buying government bonds.
Why change the way money is printed?
Before 2014, the method of printing money was to print money to buy a trade surplus, that is, a foreign exchange account, which was equivalent to the historical conversion of the anchor of the renminbi into the dollar.
In the past 10 years, the method of "creditor's rights on financial enterprises" (MLF, PSL) has been added, that is, the money that has just been baked, hot, and ultra-low interest rates is given priority to big banks, which is equivalent to injecting profits into them.
The purchase of treasury bonds in the secondary market is equivalent to indirectly issuing banknotes to the treasury, which can better solve the problems caused by the decline of land finance and support and invigorate the treasury bond market.
Yesterday, some economists suggested that an additional 5 trillion yuan of treasury bonds should be issued every year, and an additional 50 trillion yuan would be issued for 10 consecutive years.
Therefore, there is no shortage of treasury bonds in the future, and even the central bank needs "market makers".
Let's look at the question of whether the Fed is likely to cut interest rates earlier.
Last night and this morning, the US Nasdaq and S&P both hit record highs, and the prices of gold and silver also rebounded sharply. The following chart is the gold monthly candle:
Why is the global capital market jubilant? Because the U.S. unemployment rate has finally rebounded!
The US non-farm payrolls data for June slowed down yesterday evening, the unemployment rate rebounded, and the data from previous months was also revised downward.
Interestingly, the rebound in the unemployment rate is seen as a major positive. Why is this happening?
When central banks decide to cut or raise interest rates, they look at two main indicators: the unemployment rate and the inflation rate.
If the unemployment rate rebounds and inflation falls back to the regulatory target, interest rates may be cut. Otherwise, interest rates may be raised.
After the epidemic, the United States threw coins and started a round of economic upward cycle, with high inflation and a sharp drop in the unemployment rate, which triggered interest rate hikes.
Then, the Fed's monetary policy entered a period of observation, waiting for inflation to fall back and unemployment to rebound.
U.S. inflation has also fallen recently (chart below):
Unemployment has rebounded and inflation is lower, leading many to believe that the Fed may cut interest rates at its mid-September meeting.
The chart above shows the timetable for this year's Fed interest rate meeting, and the possibility of a rate cut this month is non-existent. If the U.S. inflation data for June released next week is also more cooperative, then the Fed may start a rate cut cycle as early as the mid-September interest rate meeting (in the early morning of September 19, Beijing time).
If there is no rate cut in September, the rate cut will be in early November at the earliest.
In any case, it is almost certain that the Fed will start a cycle of interest rate cuts this year.
After the Fed cuts interest rates, it will greatly increase the space for China's monetary policy. In the next 2 to 3 years, it will be the time for China to continue to cut interest rates, and there is room for LPR interest rates to cut by at least 100 basis points.
Therefore, the Fed's interest rate cut has a greater impact on China's stock market, property market and economy, and if the United States starts cutting interest rates ahead of schedule, it will be an unexpected positive.
There is another super event in July, which is the Third Plenum. The plenum will introduce a new round of reform and opening up measures, which deserves attention.